How Bankruptcy Can—and Cannot—Affect Your Retirement Savings

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What happens to your retirement funds in a bankruptcy proceeding depends on whether you are already retired or are planning to retire in the near future. It also depends on the type of bankruptcy you file for. Other rules cover the garnishment of Social Security benefits and the types of debt that can be discharged under bankruptcy.

Filing Prior to Retirement

If you haven't retired yet, the money in your retirement accounts—such as a 401(k), 403(b), 457(b), Keogh, or other profit-sharing or defined benefit plan—can not be touched by creditors if you file for Chapter 7 bankruptcy, regardless of how much money you have saved in them. Chapter 7 is the most common form of bankruptcy and involves a court-appointed trustee liquidating your assets and distributing the money to your creditors.

The money in those kinds of accounts also will not affect the amount you would have to pay back after filing for Chapter 13 bankruptcy, which is more complex than Chapter 7 and involves setting up a court-approved repayment plan. 

If you have funds saved in an IRA, Roth IRA, SEP-IRA, or SIMPLE IRA, the funds are also generally exempt from creditors, but only up to a certain limit. That limit will be $1,362,800 (for all IRAs combined) until April 1, 2022. The amount adjusts every three years according to the cost of living.

Filing After Retirement

If you have retired and are taking income from your retirement accounts, that money is more accessible to creditors. The key point is how much income you need to meet your living expenses. For individuals who file for Chapter 7 bankruptcy, anything above what you need to support yourself could be fair game to creditors. For those who file for Chapter 13 bankruptcy, the income from your retirement plan or plans will likely be included in determining how much of your debt you can afford to repay.

Social Security Benefits

Under federal law, most creditors cannot garnish your Social Security benefits. However, the federal government does allow money to be taken from your Social Security check before it's sent to you for the payment of federal taxes, federal debts including student loans, child support and alimony, and court-ordered restitution owed to the victim of a crime.

Once the money hits your bank account, however, the money can be taken by creditors. The good news is that, under a rule established in 2011 and updated in 2013, banks must know whether federal benefits are included in an account before they allow money to be seized. If Social Security or similar government benefits are included in an account, the bank must protect two months’ worth of those benefits from creditors.

Discharging Debt

Under Chapter 7 bankruptcy, your medical bills can be discharged—that is, completely wiped away. Credit card debt, personal loans, utility bills, attorney fees, and some court judgments can also be discharged. Mortgages, car loans, liens, and other tax bills, child support, and most student loan debts are generally non-dischargeable in a Chapter 7 bankruptcy.

Making the Decision

If you feel like you are drowning in unpaid medical bills or credit card interest and late fees, bankruptcy could offer some relief.

However, some seniors may be considered “judgment proof,” which means that they simply do not have anything for creditors to collect if they sue and win. If you're in that type of situation, a bankruptcy may be unnecessary. Consult an attorney about whether or not filing for bankruptcy makes sense for you.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.